I recognize as well as anyone just how hard it is to let go of a good deal. There is that human trait that drives us to focus on the bird in the hand and try not to think about the future.
The bird in the hand, that low life insurance rate you are paying right now, can be the perfect solution and it can also be a false sense of security. People, life insurance consumers, are so attracted to 10 year term insurance rates because, face it, they are cheap. The other side of that deal is that there are plenty of life insurance agents out there who will take the easy deal and not try to explain that a 10 year policy is not the appropriate way to deal with a 20 or 30 year need.
Now, don’t get me wrong. If all a person can afford is a 10 year term, better that than nothing. But I also believe that if the need is, say 20 years, a person should strongly consider a lower amount of insurance that will stay in force for the full length of the need.
Tricky thing, balancing need and budget, but the truth is that most 10 year term is not purchased because that’s all a person can afford. Most 10 year term is purchased out of ignorance of the implications of that decision. People don’t consider what happens if there is a health change. They don’t have the agent run the numbers so they will have an idea what it would cost to get a new policy at the end of the 10 years. The cost of waiting very often makes the small difference in initial price seem foolish in comparison.
Just an example. Let’s use a 50 year old guy in preferred health. He buys $500,000 of 10 year term, even though he admits that his mortgage payoff and retirement will likely be more of a 20 year need. The good news is that the policy has a rate of $660 annually. Very affordable. If he went with the 20 year term now, it would be $1140 annually. But, he buys the 10 year term.
Two scenarios. Over the next 10 years his health remains the same and he decides to buy a new 10 year term. The new policy is $1700 annually. Over the full 20 years he will pay $23,600 for the life insurance coverage. It wouldn’t be a huge savings, but if he had purchased a 20 year term in the beginning, his total cost would have been $22,800.
The real problem comes with health changes. Let’s say, for instance, that he develops diabetes before he reaches age 60. Assuming the best possible scenario, his new 10 year term at age 60 will cost $2265.00, making his 20 year cost $29,250.
Bottom line. There is a cost to waiting and there can be a huge cost to gambling on your future health. Make your agent show you all sides of the story before you make your final decision. It could be that having two policies with different term lengths could be the answer, a method called staggering.